Most business owners who reach out to us already have a retirement plan in place. In most cases, this is a 401(k) plan or a SEP.
But sometimes business owners come to us and have a SIMPLE IRA in place. But they’re unhappy with the low level of contributions, and they want to get a bit more into a plan by setting up a defined benefit plan, along with the SIMPLE.
In this post, we will discuss rules when it comes to combining a SIMPLE IRA with a defined benefit or cash balance plan. Let’s jump in.
Some Background
The owner of a small business such as a sole proprietorship, partnership, S or C-Corp, has several options to choose from when saving for retirement. They can set up a SIMPLE IRA, a SIMPLE 401(k), a One-Participant 401(k), or a Defined Benefit Plan.
Each of these plans have tax advantages and can enable owners and their employees to save significant amounts of money towards retirement. However, it is important to choose the type of plan that fits the best with company structure, cash flow availability, and tax needs. Let’s examine each plan in detail below.
When Does a SIMPLE IRA Work Well?
Simple IRAs only work in very specific situations. If you want to contribute to retirement but want to get more into a plan, then a traditional IRA but less than a 401(k). A simple can work very well for you.
But they are very inflexible. In fact, the IRS prohibits them from being combined with any other retirement structures, not just to find benefit plans.
So why would you even have one? Good question. In most situations, you shouldn’t have one. They only make sense if you’re in a limited contribution range of around $10,000-$15,000 a year. While getting a contribution is great, the levels are very low, and the inflexibility that comes combines with not being able to combine with other plant structures is just too restrictive.
In most situations, the business owner should steer away from simple IRAs and start with the 401(k) plan. At least, when they desire to make larger contributions, a 401(k) can be combined with defined benefit plans in cash balance plans to supercharge retirement contributions.
SIMPLE IRA Rules
General Requirements:
- Used for small companies with fewer than 100 employees.
- Contribution limit of $17,000 for 2026.
- Employers must contribute each year.
- Contributions vest immediately.
- Require less paperwork and filing requirements each year. No Form 5500 required.
- Employer can choose either matching contributions or a set 2% contribution for each employee, regardless of whether the employee elects to contribute to the
plan as well. - Must be set up between January 1 and October 1 of the tax year (unless company is
established after October 1). - Cannot be combined with other plans such as profit sharing or 401(k).
The SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer-sponsored option that enables employers to either match an employee’s plan contributions or contribute to an employee’s plan at a set percentage rate.
Typical matching is 1-3%, while set contributions are 2%. It is important to note that the company must choose from either matching or direct contributions. All contributions are immediately vested into the plan unlike a limited purposes HRA.
SIMPLE IRA’s are easier and require less paperwork than other retirement options for a small business. This can be a strong advantage for companies that want to offer retirement plan options for their employees, but do not want to be forced to pay for an actuary to revalue the plan on a yearly basis or face a heavy administrative burden.
In addition, sole proprietors can contribute to themselves on both an employer- and employee-based 3% maximum, so it is possible for the sole proprietor to contribute up to $26,000 per year ($32,000 if they are 50 or older).
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Can You Combine a SIMPLE IRA With a Defined Benefit Plan or Cash Balance Plan?
Unfortunately, this is when I usually have to be the bearer of bad news. You cannot combine SIMPLE IRAs with defined benefit plans or cash balance plans. The IRS specifically prohibits you from funding both plans at the same time.
Well, most people aren’t happy about this news. But they at least can set the plan up in a subsequent year. In some situations, they can fix the contributions.
Final Thoughts
A SIMPLE IRA can be a solid “starter” retirement plan, especially when you want low admin and predictable contributions. But the tradeoff is that it’s extremely rigid, and it quickly becomes a bottleneck once you’re trying to make larger, tax-driven contributions. Most importantly, you generally can’t fund a SIMPLE IRA in the same calendar year that employees accrue a benefit in a defined benefit or cash balance plan.
If your goal is to move up to a defined benefit or cash balance plan, the practical solution is usually timing and a clean transition. SIMPLE IRAs must be maintained for the full calendar year once started, so you can’t just shut it down mid-year and start a DB plan next week.
To discontinue the SIMPLE for the following year, the IRS guidance is to notify employees within a reasonable time before November 2 that you’ll end it effective January 1, and also notify the financial institution/payroll provider that contributions will stop.
Once you line up the dates correctly, you can design the next step around your real objective: higher deductible contributions, better flexibility, and a structure that still works for employees. That’s where a cash balance or defined benefit plan (often paired with a 401(k)) typically becomes the more scalable option than trying to stretch a SIMPLE beyond what it was built to do.
Because eligibility and “exclusive plan” rules can also be impacted by controlled-group relationships, it’s worth running the plan design through a specialist before you make any moves, so the switch is clean and the deductions hold up.
Is a Cash Balance or Defined Benefit Plan Right For You?
